Recent PPP Developments: Treasury Department Extends Deadline for Repayment Safe Harbor and Provides Additional “Affiliation” and Certain Other Guidance


The Treasury Department continues to update and expand its Frequently Asked Questions (FAQs) for the Paycheck Protection Program (PPP), and did so most recently on May 5, 2020. Certain significant newly added FAQs are discussed below.

Extension of safe harbor deadline

FAQ #43 extends the repayment safe harbor deadline from May 7, 2020 to May 14, 2020. Previous guidance provided that any borrower that applied for a PPP loan prior to April 24, 2020 and repaid the loan in full by May 7, 2020 would be deemed by SBA to have made the “economic necessity” certification in good faith. (The economic necessity certification is included in the Borrower Application Form and requires a loan applicant to certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Many borrowers reconsidered their eligibility to make this certification as a result of FAQ #31, originally posted on April 23, 2020, which directed loan applicants to consider, among other things, their ability to access other sources of liquidity “sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”)

New “affiliation” guidance

FAQ #44 provides new guidance on the application of affiliation rules. This important new FAQ specifies that: “For purposes of the PPP’s 500 or fewer employee size standard, an applicant must count all of its employees and the employees of its U.S and foreign affiliates, absent a waiver of or an exception to the affiliation rules [e.g., the waiver for restaurants, hotels, and other qualifying hospitality businesses]. 13 C.F.R. 121.301(f)(6). . . .”

Certain prior interim final rules issued by the Treasury Department seem to conflict with FAQ #44. Specifically, Interim Final Rule 1, originally posted on April 2, 2020, specified: “You are eligible for a PPP loan if you have 500 or fewer employees whose principal place of residence is in the United States.” Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 20,811, 20,812 (April 15, 2020). Additionally, the Interim Final Rule on Applicable Affiliation Rules, which was originally posted on April 3, 2020, stated: “An entity generally is eligible for the PPP if it, combined with its affiliates . . . has 500 or fewer employees whose principal place of residence is in the United States[.]” Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 20,817, 20,818 (April 15, 2020).

It is unclear whether FAQ #44 should be applied retroactively with respect to determinations of no affiliation that pre-dated FAQ #44 and were based on the premise that the 500 employee threshold only applied to U.S. employees. However, current applicants should be mindful of this new guidance, and borrowers with existing PPP loans should remain vigilant for any additional guidance that may be issued on this point before the (extended) May 14, 2020 repayment safe harbor deadline.

Exclusion from the loan forgiveness reduction calculation for laid-off employees whom the borrower offers to re-hire

On Sunday May 3, 2020, the Treasury Department issued FAQ #40, which provides the following additional exclusion from the loan forgiveness reduction calculation provisions of the PPP:

“. . . SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower.”

As context for this clarification, the headcount reduction formula under the CARES Act loan forgiveness reduction framework generally works as follows. A PPP borrower may not be entitled to forgiveness of all proceeds utilized during the 8-week period after funds are disbursed if, depending on certain factors as described below, a reduction in the headcount of full-time equivalent (“FTE”) employees has occurred.[1] Specifically, at the end of the 8-week period after disbursement of the loan, the borrower will calculate the average monthly FTE employee headcount during the first the 8-week period, and divide that number by the average monthly FTE employee headcount during, at the election of the borrower, either the period (i) February 15, 2019 through June 30, 2019, or (ii) January 1, 2020 through February 29, 2020.  In the event that the resulting quotient is less than 1, the borrower’s loan forgiveness will be reduced by the fraction that the quotient is less than 1. It does not matter whether FTE employees leave voluntarily or are terminated during the 8-week period.

The CARES Act, however, provides an exception to headcount reduction test (as well as the separate wage reduction test) to the extent that, by no later than June 30, 2020, the employer has eliminated the FTE headcount reduction (or the wage reduction). As noted above, FAQ #40 indicated that a new interim final rule will provide that this exception will apply even if, subject to certain conditions, the former employee does not accept the offer of reemployment.

Other recently posted interim final rules

The Treasury Department continues periodically to post interim final rules related to various issues under the PPP, the two most recent of which are briefly discussed below.

The Interim Final Rule on Corporate Groups and Non-Bank and Non-Insured Depository Institution Lenders, which was originally posted on April 30, 2020, provides that businesses that are part of a single corporate group may receive no more than an aggregate of $20,000,000 in PPP loans. For purposes of this limit, businesses are part of a single corporate group if they are majority-owned, directly or indirectly, by a common parent. The limitation applies to any loan that had not yet been fully disbursed as of April 30, 2020. (For loans that have been partially disbursed, this limitation applies to any additional disbursement that would cause the total PPP loans to a single corporate group to exceed $20 million.)

The Rule also states that it is the responsibility of a PPP loan applicant to notify the lender if the applicant has applied for or received PPP loans in excess of the limitation, and to withdraw or request cancellation of any pending PPP loan application or approved PPP loan that is noncompliant. Additionally, the Rule provides certain guidance regarding the eligibility of non-banks to participate as PPP lenders.

The Interim Final Rule on Nondiscrimination and Additional Eligibility Criteria, which was originally posted on May 5, 2020, generally provides that: (i) recipients of PPP loans are entitled to exemptions on the grounds provided in Federal nondiscrimination laws for sex-specific admissions practices, sex-specific domestic violence shelters, coreligionist housing, or Indian tribal preferences in connection with adoption or foster care practices; and (ii) student workers count when determining the number of employees for PPP loan eligibility.

[1] The CARES Act also includes, separately, a “wage reduction” loan forgiveness reduction formula. The wage reduction test does not apply to any employee who earned during any pay period in 2019 wages or salary at an annualized rate of more than $100,000.  The test provides that if an employee receives during the 8-week period after the loan is disbursed, salary or wages at an annual rate of less than 75% of the annualized compensation that the employee received in the last full quarter prior to the 8-week period, the forgiveness amount will be reduced dollar for dollar by the amount that the annualized salary received during the 8-week period is more than 25% less than the annual compensation received during the last full quarter of employment before the 8-week period. For example, if the employee received $25,000 during the last quarter of 2019 (i.e. an annualized salary of $100,000), the employee could receive $11,538.46 during the covered period (i.e., annualized comp of $75,000, multiplied by 8/52) without the borrower receiving any reduction in forgiveness.  To the extent that the borrower received less than $11,538.46 during the covered period, the loan forgiveness would be reduced dollar for dollar.